North American renewable project financings should remain steady in 2024 after a record 2023, though proposed capital requirements for large banks could significantly shrink the tax equity market when an expected final rule is published later this year.
Tax equity volume for US projects was roughly $20 billion to $21 billion in 2023, an increase from about $18 billion realized in 2022, according to experts participating in a Jan. 11 webinar hosted by law firm Norton Rose Fulbright on the outlook for cost of capital.
Jack Cargas, managing director and head of tax equity origination at Bank of America Corp., estimated there were $4 billion in tax credit sales in 2023 during the first year that the transfer market was open.
Both Cargas and Rubiao Song, managing director and head of energy investments at JPMorgan Chase & Co., said they do not expect tax equity volumes to dip in 2024.
But Song expressed concern that a proposed Federal Reserve and Federal Deposit Insurance Corp. rulemaking to implement Basel III — a set of global banking standards developed in response to the 2007–2008 financial crisis — could strain tax equity availability even further.
The proposal would substantially raise the capital requirements for most tax equity investments outside of community development investments, such as low-income housing tax credit investments, effectively making banks hold $4 in reserves for every dollar of tax equity provided for clean energy projects, compared to $1 under current rules.
"A lot of downside scenarios are being evaluated," Song said. "There's a lot of caution right now that's slowing down the market."
If there is no resolution to the "elephant in the room" by midyear, Song said, major bank investors will likely pause issuing new production tax credit commitments. However, regulators are signaling that the 400% capital weighting for tax equity was not intentional.
In the meantime, demand from corporates for tax credit transfers is strong even though some remain cautious by "only buying credits from investment-grade sponsors or they require tax insurance," Song said.
A hybrid model is being developed to allow tax equity partnerships to sell the tax credits and allocate to the tax equity investor the depreciation, which is not otherwise monetized in tax credit transfers. Bank of America's Cargas said he is hoping for some standardization in 2024 to streamline the volume of information buyers and insurers are looking for.
"When we first started thinking about these transactions the marketplace told itself that due diligence would be a whole lot easier to do than for tax equity deals, and that may be true from a documentation perspective, but the diligence factor is surprisingly voluminous," Cargas said.
Debt deals
On the debt side, North American energy infrastructure project finance lending totaled at least $115 billion across over 214 closed deals in 2023, compared to $116 billion over 226 deals in 2022, according to an estimate by Ralph Cho, co-CEO of Apterra Infrastructure Capital LLC, an affiliate of Apollo Global Capital Inc.
"We had deals coming out of our ears," Cho said.
Some of the megadeals lenders closed last year included Pattern Energy Group LP's $11 billion of financing for the 3.5-GW SunZia Wind and 550-mile SunZia Transmission projects under development in New Mexico and the Southeast; and NextDecade Corp.'s $356 million of senior loans for the planned Rio Grande LNG LLC export facility in Brownsville, Texas, according to Cho.
Cho noted that while the Silicon Valley Bank collapse and the ensuing regional banking crisis strained capital costs, private debt's rise helped level the playing field.
As with a $600 million credit facility Apterra led for Longroad Energy Holdings LLC in 2023, Cho anticipates commercial banks and private lenders will continue to team up in 2024. However, they will not be interested in green hydrogen following the stringent conditions stipulated in the US Treasury Department's long-awaited guidance for the hydrogen production tax credit.
While Cho expects LNG project financing deals to slow in 2024, merchant gas project deals could still appeal to commercial lenders with some modifications.
"It's a tough sell to banks given that a lot of them are trying to decarbonize their books, but ... if borrowers want to do something creative with their asset like add a hydrogen burner or an ammonia burner as a primary fuel source or maybe add a carbon capture system to these conventional thermal assets, that could bring some ESG-focused banks back," Cho said.